COVID-19 Legal Series (7): Will the Pandemic Impact Enforcement of Foreign Arbitral Awards in China?

As of Mar. 25, the CCPIT had issued more than 6,400 such certificates to help businesses avoid liability for failing to perform their contractual obligations, covering contracts worth RMB632.1 billion (around $89 billion). However, there have already been reports of foreign counterparties rejecting Chinese force majeure claims. Bloomberg reported that two of Europe's energy giants, Shell and Total, have rejected China National Offshore Oil Corporation's requests for reduction in shipments and are likely to seek compensation.

If these disputes are arbitrated outside China, will the final awards be enforced in China? Under normal circumstances, they should be, said Andrew Chung, a Hong Kong-based disputes partner at Linklaters. China is a contracting state to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), meaning that foreign arbitral awards are enforceable there.

"Under the New York Convention and PRC law, an award by a foreign tribunal that has adjudicated and determined there to be no force majeure event notwithstanding the issuance of a CCPIT certificate should be enforceable like any other award," Chung explained.

Article V of the New York Convention stipulates that contracting states are not allowed to refuse enforcement based on the merits of a foreign tribunal's decision. "The key question in a force majeure dispute is how the pandemic has impacted the performance of a contract," said Fang Qi, a Beijing-based partner at Fangda Partners. "That question is for the tribunal to answer during the arbitration, not the Chinese courts during recognition and enforcement of the award."

What Chinese courts do consider during the enforcement stage is China's "public policy." Under the New York Convention, a country can refuse to recognize or enforce a foreign award if doing so would be "contrary to the public policy of that country." There is no explicit definition of what "public policy" constitutes under Chinese law. However, China's Supreme People's Court (SPC) has in the past explained its interpretation as meaning "violation of the basic principles, infringement of national sovereignty, jeopardizing public security, violation of public policy and other circumstances which will infringe the basic public interest."

Could a foreign award against a Chinese party in possession of a force majeure certificate fall into the scope of the public policy exception? Vincent Mu, a Shanghai-based disputes partner at Llinks Law Offices, does not believe so. As broad as it may sound, Chinese courts have in fact applied the public policy exception very narrowly. He points out that Chinese courts have enforced foreign awards even when the awards violated China's regulations concerning futures trading and quality standards for agricultural commodities.

"Compared with those precedents, CCPIT's certificates appear to carry less weight, making it unlikely to be a public policy trigger," said Mu.

Past cases suggest that China does not even consider awards that are unfair or have misapplied Chinese laws as contrary to public policy. In fact, only a handful of foreign awards have failed to be enforced in China due to the public policy exception since China acceded to the New York Convention in 1987, according to China Justice Observer, a blog covering Chinese judicial developments. Most of these relate to infringement of China's judicial sovereignty, whereby a foreign award revisits issues that have already been decided by a Chinese court.

As such, Chinese courts will respect foreign tribunals' discretion when it comes to deciding the admissibility and significance of force majeure certificates, says Zhang Jian, a scholar at the SPC researching the enforcement of foreign arbitral awards in China. The certificates are not intended to act as conclusive evidence in an arbitration, he says, pointing out that the CCPIT has itself described the purpose of the certificates as simply "certifying the facts of the outbreak."

"Under Chinese law, parties must prove not only that force majeure has occurred but also that they have been harmed, they cannot overcome the situation, and they cannot have foreseen the situation," he said. "The certificates only work as one of the elements to make a successful force majeure claim so that a party can be exempted from liability for non-performance."

All the lawyers we spoke to agree that both Chinese and foreign tribunals are expected to handle force majeure claims with consideration to other factors in addition to the certificates. These include the force majeure clause of the contract itself – whether the current pandemic is listed in the clause as a force majeure event – as well as its governing law, which can impose specific legal requirements on force majeure claimants.

There are yet to be actual decisions arising from the pandemic on enforcement of foreign arbitral awards in China. On average, Chinese courts take just under one year to decide whether to enforce foreign arbitral awards, according to a survey by King & Wood Mallesons. However, domestic disputes can provide early insight into how Chinese courts are handling force majeure. In February, a ride-hailing driver filed a force majeure claim against a car leasing company in Zhejiang province over a car rental agreement signed in November. The driver argued that the government's lockdown policies constitute force majeure, thereby rendering performance of the contract impossible.

The driver filed for the contract to be terminated on Feb. 15, as well as a refund from the car leasing company of his deposit. However, as the company was scheduled to resume work not long after, it proposed a reduction or waiving of rent rather than a termination of the contract, which stipulated a one-year lease. In the end, the driver conceded to the car leasing company and agreed to continue performance of the contract.

In another recent case in Zhejiang, a landlord took a short-term housing operator to court over alleged breach of contract. The operator was claiming force majeure and wanted to terminate a five-year rental agreement signed in November 2018 due to government measures closing off the building in question to non-residents. The landlord suggested a reduction in rent, but the operator insisted on terminating the contract and a refund of pre-paid rent. In the end, the operator had to pay a penalty and lose his pre-paid rent in order for the contract to be terminated.

These cases reflect the scope of outcomes possible for force majeure disputes in China. Article 117 of the PRC Contract Law (中华人民共和国合同法) stipulates that liability for non-performance is "partially or wholly exempted" depending on the specific impact of the force majeure event on a claimant. Meanwhile, termination of the contract is only permitted when a force majeure event "makes the objective of the contract unachievable."

In both cases, the outbreak disrupted performance of the contracts, but not to the extent that the purpose of the contracts could no longer be achieved as both contracts were at their early stages. The courts in both cases did not allow the force majeure claimants to simply terminate the contract, demonstrating that Chinese law requires more than just proof of a force majeure event if a party wants to escape their contractual obligations.

For this reason, the certificates are unlikely to prove decisive when Chinese courts decide whether to enforce foreign arbitral awards. However, they do serve as early indications of the Chinese government's intent to help local businesses navigate an increasingly uncertain global economic outlook in the months and years ahead.

"There's a concern that courts in China and elsewhere might be protectionist and try to protect their industries from the consequences of Covid-19," a Hong Kong-based disputes partner said.